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Ask Rusty: Social Security matters

Dear Rusty: I turned 62 in October 2018. A few months prior to my birth month, I went on the Social Security website which said my estimated benefits would be between $900-$1,000 at full retirement age and between $600-$700 at age 62.

I receive a pension from a city government where I was a firefighter for almost 20 years where I did not pay Social Security tax on my income, but I have over 20 years invested in Social Security from other jobs. I expected the cut in benefits for retiring early (62), but I was totally caught off guard by my benefits being cut in half again because of the Windfall Elimination Provision (WEP).

My city pension is about $1,700 monthly, and it’s my understanding that WEP is not supposed to reduce my Social Security by more than half of my government pension. My current Social Security benefit is $348 a month, which is considerably less than half of my $1,700 pension. Am I missing something? Shouldn’t I be getting $600-$700 in Social Security benefits?

— Retired Firefighter

Dear Retired Firefighter:

WEP rules are complicated and you certainly aren’t alone in your dismay over how WEP affects Social Security benefits for public servants in certain states which didn’t participate in Social Security. I’ll try to shed some light on what happened to your benefit amount.

The first thing you should know is that the estimates you received from Social Security before you claimed were just that – estimates. If you were working in SS-covered employment prior to getting the estimate, the amounts given assumed you would continue to work at your recent SS-covered earnings until your full retirement age. If you didn’t, your full retirement age (FRA) benefit amount would be less than the amount quoted. The estimate given at that time didn’t take WEP into account either. The WEP reduction takes place before the reduction for claiming early at age 62. WEP affects your “primary insurance amount” (PIA), which is the amount you’re normally entitled to at your full retirement age from SS-covered work.

When you applied for Social Security your PIA was recomputed using a special WEP formula. Your PIA is based on your “average indexed monthly earnings” or “AIME,” which is the monthly average of the highest earning 35 years over your lifetime in which you contributed to Social Security.

Your PIA is determined by breaking your AIME into three parts (called “bend points”), multiplying those parts by a certain percentage for each part, and totaling up those three computations. When WEP applies, the first part of your AIME is multiplied by 40 percent, rather than the normal 90 percent, of the first $895 of your AIME (this is the amount for your “eligibility year” 2018).

So, the first part of your WEP AIME would contribute $358 (instead of the normal $805) to your PIA and, thus, to your FRA benefit amount — a reduction of $447. (If you have more than 20 years of substantial earnings in SS-covered employment, the impact of WEP is lessened by about 5 percent for each year over 20).There is a maximum WEP reduction ($447 for 2018) and there is also a rule which says your WEP reduction cannot be more than half of your non-covered pension amount. But since half of your city pension is more than $447, that rule does not change the WEP reduction.

So, using your general numbers, if your FRA benefit (before WEP) was “$900-$1,000,” let’s say that your normal PIA was about $950. After the WEP reduction your WEP PIA would be about $503, which is what you would get if you waited until your full retirement age to claim Social Security.

By claiming at age 62, your benefit was reduced by about 27 percent, which would make your benefit about $367/month. This isn’t far from what you are now getting, considering that we’re using only estimated numbers in these calculations.

Remember, the SS rule doesn’t say that your WEP reduced benefit amount can’t be less than half of your non-covered pension amount. Instead it says that the WEP reduction to your PIA can’t be more than that. 

This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity.

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